HUMAN RESOURCE

MANAGEMENT

COMPENSATION
MANAGEMENT

CHAPTER NO. 8
AFTER STUDYING THIS CHAPTER YOU SHOULD BE ABLE TO:

 Understand Compensation management and its objectives.

 Identify two types of compensation.
 Discuss the four phase wise model of compensation
management.
 Define job evaluation and discuss four methods of performing it.
 Describe how to Conduct salary survey and establish pay
structure.
 Comprehend financial reward on the basis of individual and
group rewards.
 Evaluate advantages and disadvantages of paying equal to
market, less than the market and above than the market.
 WHAT IS COMPENSATION

COMPENSATION

Compensation is what employee receives in exchange for

their contribution to the organization.
 WHAT IS COMPENSATION
MANAGEMENT

COMPENSATION
MANAGEMENT

Compensation management help the

organization to obtain, maintain and
retain a productive Workforce.
 OBJECTIVES OF
COMPENSATION MANAGEMENT

 Legal compliance with all appropriate laws and regulations.

 Cost effectiveness for the organization.

 Internal, external, and individual equity for employees.

 Performance enhancement for the organization.

TYPES OF COMPENSATION

Types of
Compensation

1. Intrinsic
Compensation

2. Extrinsic
Compensation
 PHASE WISE MODEL OF
COMPENSATION MANAGEMENT
Phase 1 Job Analysis
Identity and Study jobs

Job Description Job Specification

Phase 2
Internal Equity Job Evaluation

Job Ranking Job Grading Factor Comparison Point System

Phase 3
External Equity Salary & Wages Survey

Dept. Of Labor Employee Associations Professional Association Self Conducted Survey

Phase 4
Matching Internal and Pricing Job
External Work

Job Evaluation Worth Match Rate & Range for Each Job Labor Market Worth
 PHASE WISE MODEL OF
COMPENSATION MANAGEMENT

Phase 1
Identity and
Job Analysis Study jobs

Job
Description

Job
Specification
 JOB ANALYSIS

JOB ANALYSIS

A Systematic way of gathering and analyzing

information about the Content, Context, and
the Human Requirements of jobs for the
purpose of developing Job description, Job
specification & Job evaluation.
 PHASE WISE MODEL OF
COMPENSATION MANAGEMENT

Job Evaluation Phase 2

Internal
Equity
Job
Ranking

Job
Grading

Factor
Comparison

Point
System
 JOB EVALUATION

Systematically determining the relative

worth of the jobs to create job structure.

Or
Determining the worth of job for reward,
benefits & compensation system.
JOB EVALUATION METHODS

1. Job Ranking
Method

2. Job Grading /
4. Point System Classification
Method

3. Factor
Comparison
Method
 1. JOB RANKING METHOD

DEFINITION

Arrangement of job in a simple rank order form

highest to lowest or form lowest to highest.

Raters examine the JD of the each job.

Arrange in order according to value. e.g. starting from lowest

to highest

 Janitor ranked 1
 Secretary gets 2
 Office manager gets 3
2. JOB GRADING METHOD

Assigned a grade or class for each job.

• These classification are created by

identifying a number of job related factors
Step 1 such as, education, experience and
responsibilities with the goal to determine
classes or grades of Job.

• After classifications, jobs are ranked

in an overall order of importance
Step 2 according to criteria chosen and each
job is placed in its appropriate grade

• The standard description that most

Step 3 nearly matches the JD determines
the job’s grading/classification.
3. FACTOR COMPARISON METHOD

The each compensable factor such as

responsibility, skill, mental effort, physically effort and
working conditions is compared one at time with the
same factor for other key job and then evaluated.

i. Determine the
Compensable Factor

ii. Determine Key Jobs

Steps Of iii. Apportion Present

Factor Wages for Key Jobs
Comparison iv. Place Key Jobs on a
Method Factor Comparison Chart

v. Evaluate Other Jobs

 4. POINT SYSTEM METHOD

An approach to job evaluation in which numerical values are assigned to

specific job factors and the sum of those values provides a quantitative
assessment of a job’s relative worth.

Determine the Critical factor

1
Determine Sub-factor
2
Steps Of Determine the levels of factors
3
Point System
Allocate points to factor
Method 4 under each level

Develop a point manual

5
Apply the point system
6
 1st 2nd 3rd 4th 5th
Factors Degree
Degree Degree Degree Degree
SKILL
• Education 15 30 45 60 75
• Experience 20 40 60 80 100
• Initiative and Ingenuity 15 30 45 60 75
EFFORT
• Physical demand 10 20 30 40 50
• Mental or visual demand 5 10 15 20 25
RESPONSIBILITY
• Equipment or process 5 10 15 20 25
• Material or product 5 10 15 20 25
• Safety of others 5 10 15 20 25
• Work of other job conditions 5 10 15 20 25
JOB CONDITIONS
• Working conditions 10 20 30 40 50
• Unavoidable hazards 5 10 15 20 25
A Point Manual Description of “Responsibility:
Equipment and Material”
1. RESPONSIBILITY

b. Equipment and materials: each employee is responsible for conserving

the company’s equipment and material. This includes reporting mal
functioning, equipment or defected material, keeping equipment and
material clean or in proper order, and maintaining , repairing, or
modifying equipment and materials according to individual job duty.
The company recognizes that the degree of responsibility for

equipment and material varies widely through out the organization

Level1: Employee reports mal functioning equipment or defective materials to immediate

superior.
Level 2: Employee maintain the appearance of equipment or order of materials and has
responsibilities for the security of such equipments and materials
Level 3: Employee performs preventive maintenance and minor repairs on equipment or
corrects minor defects in materials
Level 4: Employee performs major maintenance or overhauls of equipment or is
responsible for deciding type, quantity, and quality of material to be used.
 PHASE WISE MODEL OF
COMPENSATION MANAGEMENT

Wage & Salary

Survey Phase 3
External
Equity
Department of
Labor

Employee
Associations

Professional
Association

Self-Conducted
Surveys
 WAGE AND SALARY SURVEY
A collection of data on existing compensation rates for workers
performing similar jobs in other organizations.

Steps in Wage And

Salary Survey

Department of Labor
i. Identifying Key Jobs
Employee
Associations
ii. Selecting the Organizations
to Survey Professional
Association

iii. Data Collection Sources Self-Conducted

Surveys

iv. Interpreting the Data On live Surveys

 PRICING JOB

Allocate the Value to the job After matching the job evaluation
worth with the market worth.

Phase 4
Establishing Pay Matching
Structure Internal and
External Work

Establishment of Pay Grades

Establishment of Pay Ranges

ESTABLISHING PAY STRUCTURE

• Used for tying pay survey information to job

Wage evaluation data.
Curve
• The line on a graph showing the relationship
between job value, as determined by job
Market evaluation points, and pay survey rates.
Line
• A grouping of individual jobs having
Pay approximately the same job worth.
Grades

• It involves collapsing multiple salary grades and

Broad ranges into a few wide levels known as bands.
Banding
• Using the market line as a starting point, the employer
can determine maximum and minimum pay levels for
each pay grade by making the market line the midpoint
Pay line of the new pay structure.
Ranges
Pay Scatter
Gram
Pay Grades &
Pay Ranges
 INCENTIVE SYSTEMS &
GAIN SHARING
• links compensation and
performance by rewarding
Incentive performance instead of seniority
or hours being worked.
System • Incentive system could be
individual based

• Matches an improvement
Gain (gain) in performance with a
Sharing distribution (sharing) of the
benefits with employees.
INCENTIVE SYSTEMS & GAIN SHARING
INCENTIVES DESCRIPTION
Piece Work Compensates the worker for each unit of output

Production Paid to workers for exceeding output goals

Bonuses
Commissions The seller may be paid a percentage of selling price or a
flat amount for each unit sold
Merit Raises Pay increases given after an evaluation of performance

Pay for Rewarding employees with higher pay as an incentive

for increased knowledge or skills they acquire.
knowledge/pay
for Skills
Compensation
Non Monetary e.g. recognition programs in which employee receives
certificates, time off, vacations etc
Incentive
Executive Stock option: the right to purchase the company’s stock
at a predetermined price.
Incentive
Weighted incentive systems: reward executives on the
basis of improvements in the multiple areas of business
INCENTIVE SYSTEMS & GAIN SHARING

GAIN
DESCRIPTION
SHARING
Employee Many company have stock purchase plans that
allow workers to buy shares in the company, so
Ownership owing the fractional part of the firm and sharing
its success
Production Allow groups of workers to receive bonuses for
exceeding predetermined levels of output.
Sharing
Plans
Profit Share profits with the employees
Sharing
Plans
Cost Scanlon Plan: Employees aim to reduce costs and
then share in the savings that result.
Reduction
Bonuses on improvements in quality of labor costs
plans compared with the historical norms
 EQUITY FACTOR APPROACH

The perceived fairness of the relation between what a

person does (inputs) and what the person receives
(outcomes).
EQUITY FACTOR APPROACH Cont . . .

COMPARISON
PERSON
OTHER

My Rewards (Outcomes) Other’s Rewards

My Contributions (Inputs) Other's Contributions Equity

Inequity
My Rewards Other’s Rewards
(Under-
My Contributions Other's Contributions
Rewarded)
Inequity
My Rewards Other’s Rewards
(Over-
My Contributions Other's Contributions
Rewarded)
 PHASE WISE MODEL OF
COMPENSATION MANAGEMENT

Pricing Job

Pay above the

Market Rate

Pay Market Rate

Pay below the

Market Rate
 CHAPTER 8

Intrinsic
Compensation
Types of
Compensation
Extrinsic
compensation

Financial Wages & Gain

Financial Rewards Rewards Salaries
Incentives
Sharing
Vs. Non Financial
Non Financial
Rewards Fringe
Rewards
Benefits

Phases of
COMPENSATION Compensation
Management
MANAGEMENT

Scientific1
PHASE Scientific2
PHASE Scientific3
PHASE Scientific4
PHASE
Job Analysis
Management Job Evaluation
Management External Equity
Management Pricing Job
Management
(Identify & Study the Job) (Internal Equity) (Salary & Wages Survey) (Matching Internal & External
Equity)

Scientific Scientific Scientific Scientific

Management
• Position Description
• Job Description
• Job Standard
• Job Ranking
Management • Department of Labor
Management • Job Evaluation
Management Worth
• Job Grading • Employee Associations • Match Rate & Range for
• Factor Comparison • Professional Associations each Job
• Point System • Self Conducted Survey • Labor Market Worth

Market Rate & • Pay Above the

Compensation Market Rate
Plans • Pay Market
Rate
• Pay Below the Management Quality
Market Rate Circle
 THOUGHT OF THE DAY

If you pick the right people and give them

the opportunity to spread their wings and
put compensation as a carrier behind it
you almost don't have to manage them.
“Jack Welch”